FTLive: Political will and risk to shape future of infra investing

Growing demand for assets that match liabilities along with capacity constraints in traditional hedging instruments will lead to further growth in the popularity of matching alternatives, termed “dirty hedges” in a report from research consultancy Spence Johnson this week.Panellists discuss the key risks inherent in the asset class

Nigel Birch, director at Spence Johnson, said matching alternatives such as infrastructure debt correlate well with the liabilities of pension funds but, unlike more traditional instruments, are not a perfect match and are therefore considered a “dirty hedge”.

However, Birch said demand for these assets would only increase.

“If we reach capacity in traditional derivatives, that could further drive interest in infrastructure,” he said.

Identifying the risks

Speaking at the Financial Times European Infrastructure event in London yesterday, panellists identified political will and risk mitigation as the key foundations underpinning future investment by institutional investors.

Andrew Davison, senior vice-president in Moody’s Investment Service infrastructure finance group, said political risk was “a significant impediment to predictability and confidence” for prospective investors in infrastructure.  

“Investors can selectively choose to invest or not, but that’s a pretty blunt instrument,” he said.  

“Ultimately it’s very difficult for investors to foresee this type of unexpected change… you can’t do much if you’ve made that investment and you get bitten by an unexpected manifestation of political or regulatory risk.”

Local authority in-roads

Commenting on UK local authority pension funds’ future in-roads into infrastructure, Edi Truell, adviser to the mayor of London on pensions and investments, said a “dream team” of managers was required to capture the best opportunities in the market and manage risk on an ongoing basis.

But Truell said this was currently “unaffordable” on local authority budgets across the scheme’s fragmented structure.

“You’ve got to resource it well, you’ve got to have a proper team there with different skills – investing skills, operational skills [and] political skills,” he said.

“You’ve got to have people that can actually manoeuvre their way around those political risks… It’s about understanding the totality of the projects you’re investing in.”

Truell said the long-term risks of infrastructure debt were “mispriced”. 

“Operating risk – that’s often ignored in comparison, for example, to government bonds,” he added.

“If you start to measure risk over long periods of time, over 20, 30, 100 years, you actually get very significant default risks from governments. Go for equity rather than debt.”

Truell said the Lancashire and London Pensions Partnership had divested its holdings in infrastructure debt and moved into infrastructure equity or direct asset ownership.

Mid-market opportunity

Renaud de Matharel, chief executive officer and managing partner at Cube Infrastructure, said “jumbo” deals in the European infrastructure market were potentially less attractive to investors than smaller, mid-market projects catering to the essential needs of local authorities and governments.

However, de Matharel said there was a lack of political will standing behind these projects.

“There is a lack of political support to those local authorities who are struggling every day to improve the quality of their local services to the community because they don’t have the right budgets,” he said.

“On the other side, they may not have enough support from the private sector in order to finance those mid-sized projects.”